Day trading with CFDs is a popular strategy. From pattern day trading in the US, to day traders in Europe and beyond, the leverage and costs of CFD trading, make it a viable option for active traders and intraday trades. This page provides an introductory guide, plus tips and strategy for using CFDs, and offers a list of the best brokers for CFD day trading in 2019.

IB Boast a huge market share of global trading. With a minimum deposit of $10,000 however, they remain an option for larger traders only.

IB Boast a huge market share of global trading. With a minimum deposit of $10,000 however, they remain an option for larger traders only.

Show All Brokers ⇩

What Is A CFD?

A CFD is a contract between two parties. They agree to pay the difference between the opening price and closing price of a particular market or asset. It is therefore a way to speculate on price movement, without owning the actual asset.

The performance of the CFD reflects the underlying asset. Profit and loss are established when that underlying asset value shifts in relation to the position of the opening price.

When trading CFDs with a broker, you do not own the asset being traded. You are speculating on the price movement, up or down.

CFD Example

Lets use an example. Say you select a stock with an ask price of $25 and you open a CFD to the value of 100 shares.

If buying shares the traditional way, the cost would be $2,500. There might also be commission or trading costs.

However, a CFD broker will often require just a 5% margin. This will allow you to enter the same trade but with only $125. (Actual levels of leverage or margin will vary). This makes it an attractive hunting ground for the intraday trader. The risk and reward ratio is increased, making short term trades more viable.

When you enter your CFD, the position will show a loss equal to the size of the spread. This means if the spread from your broker is 5 cents, you’ll need the stock to appreciate by at least 5 cents to break even.

CFD vs Stock

Using the above example: Let’s say the price of the underlying stock continues to increase and reaches a bid price of $26.00

If you owned the stock, your holding is now worth $2600. A nice profit – ignoring commission or trading costs the trader realised $100.

However, with the underlying stock at $26.00, the CFD would show the same $100 profit – but it required way less to open, just $125. So in terms of percentage, the CFD returned much greater profits. Had the market moved the other way, losses relative to our investment would have been larger too – both risk and reward are increased.

There are of course other benefits to owning an asset rather than speculating on the price. We also ignored commissions and spreads for clarity. But the above does illustrate the relative differences in the two methods of investing.

Application

As you are day trading you probably won’t hold any CFD positions overnight. Instead, you’ll likely place a high number of CFD trades in a single day. To maximise your returns you’ll want to concentrate on liquid volatile markets. CFD trading with oil, bitcoin, and forex are all popular options, for example.

CFD Benefits

You may have already gleaned a couple of advantages above from CFDs, but let’s break them down and add a few more.

Leverage – CFD leverage is much higher than traditional trading. You can get margin requirements as little as 2%. The rate usually depends on the underlying asset. Shares or volatile cryptocurrencies, for example, can reach up to 20%. Whilst low margin rates will allow you to take big positions with less capital, losses will also hit you harder.

Accessibility – The best CFD brokers will allow you to trade in all of the major markets. With so many markets that means CFD trading hours effectively run 24 hours a day. You’ll just need to check your brokers trading hours first.

Cost – CFD trading systems incur minimal costs. You will find many brokers charge little or zero fees to enter and exit trades. Instead, they make their money when you have to pay the spread. The size of the spread will depend on the volatility of the underlying asset. Note it is usually a fixed spread.

Less shorting rules – Some markets enforce rules that prevent you shorting at certain times. They can demand greater margin requirements for shorting as opposed to being long. The CFD market, however, generally doesn’t have such rules, as you’re not actually owning the underlying asset. This means no borrowing or shorting costs.

Less day trading requirements – Some markets require significant capital to start trading. This limits you to how many trades you can make, and in turn how much profit. An online CFD trader, however, can set up an account with as little as $1,000 to $5,000.

CFD Risks

Despite the numerous benefits, there remain a couple of downsides to CFDs you should be aware of.

Regulation – The CFD industry is not thoroughly regulated. This means it’s increasingly important you select the right broker. You need to make sure they are credible and in a strong financial position. For more guidance, see our brokers page.

Trading on margin – While margin increases profit potential, it also increases risk. It is very easy to lose sight of the total exposure you have when using margin. $2000 worth of open positions using 5% margins mean exposure to $40,000 worth of contracts. You are effectively borrowing $38k from your broker. If markets move against you, losses can exceed deposits. An awareness of the total exposure is very important.

How To Start Trading CFDs

One of the selling points of trading with CFDs is how straightforward it is to get going. You’ll need to follow just five simple steps.

1. Choose A Market

There are thousands of individual markets to choose from, including currencies, commodities, plus interest rates and bonds. Try and opt for a market you have a good understanding of. This will help you react to market developments. Most online platforms and apps have a search function that makes this process quick and hassle-free.

2. Buy Or Sell

If you buy you go long. If you sell you go short. Bring up the trading ticket on your platform and you will be able to see the current price. The first price will be the bid (sell price). The second price will be the offer (buy price).

The price of your CFD is based on the price of the underlying instrument. If you have a reason to believe the market will increase, you should buy. If you believe it will decline you should sell.

3. Trade Size

You now need to select the size of CFDs you want to trade. With a CFD, you control the size of your investment. So although the price of the underlying asset will vary, you decide how much to invest. Brokers will however, have minimum margin requirements – or more simply, a minimum amount that is required in order for the trade to be opened. This will vary asset by asset. It will always be made clear however, as will the total value (or your exposure) of the trade.

Volatile assets such as cryptocurrency normally have higher margin requirements. So a position with exposure to $2000 worth of Bitcoin, might need margin of $1000 for example. A well traded stock however, may only need 5% margin. So a $2000 position on Facebook, may only require $100 of account funds.

4. Add Stops & Limits

This will help you secure profits and limit any losses. Most CFD strategies for beginners and experienced traders will employ the use of stop losses and/or limit orders. They tie in with your risk management strategy. Once you have defined your risk tolerance you can place a stop loss to automatically close a trade once the market hits a pre-determined level. This will help you minimise losses and keep your accounts in the black – leaving you to fight another day on subsequent trades.

A limit order will instruct your platform to close a trade at a price that is better than the current market level. If you opt for a trading bot they will use pre-programmed instructions like these to enter and exit trades in line with your trading plan. These are perfect for closing trades near resistance levels, without having to constantly monitor all positions.

5. Monitor & Close

Once you’ve placed your trade and stop or loss limits, your profits will shift along with the market price. You can view the market price in real time and you can add or close new trades. This can be done on most online platforms or through apps.

If your stop loss or limit order hasn’t been activated you can close it yourself. Simply select ‘close position’ from the positions window. You will be able to see your profit or loss almost instantly in your account balance.

Strategies

Choosing the right market is one hurdle, but without an effective strategy, your profits will be few and far between. You need to find a strategy that compliments your trading style. That means it plays to your strengths, such as technical analysis. It also means it needs to fit in with your risk tolerance and financial situation.

Below two popular and successful CFD trading strategies and tips have been outlined.

Breakout Strategy

This simply requires you identifying a key price level for a given security. When the price hits your key level, you buy or sell, dependent on the trend. The main thing to remember with breakout trading is to avoid any trades when the market isn’t providing clear signals.

If you can’t quite tell which direction the overall trend is moving in then give it a miss. This is where detailed technical analysis can help. Use charts to identify patterns that will give you the best chance of telling you where the trend is heading.

Contrarian Strategy

This is all about timing. Your plan rests on the knowledge that trends don’t last forever. If a stock’s price has been on the decline then you identify a point where you believe it’s near the end of the trend. Then you enter a buy position in anticipation of the trend turning in the other direction.

You can follow exactly the same procedure if the price is rising. You can short a stock that has been increasing in price when you think a sharp change is imminent. Both Wave Theory and a range of analytical tools will help you ascertain when those shifts are going to take place.

CFD Trading Tips

If you’re looking to really bolster your profits consider these tips from top traders. Learn from their mistakes and hopefully, you won’t run into the same expensive pitfalls.

Control Your Leverage

Leverage is your greatest asset when you’ve made the right trade. The temptation to increase your position sizes when you’re winning is difficult to resist. However, there is always a loss on the horizon.

You don’t want to be the trader that turns a small account into a huge account, only to end up back at square one. So, you need to be smart. Nobody wants the margin calls and the stress that come with big losses. As Paul Tudor Jones famously said, ‘Don’t focus on making money, focus on protecting what you have.’

Having said that, start small to begin with. Keep your exposure relatively low in comparison to your capital. It’s a good idea not to leverage more than 3 times your account size, particularly at the beginning.

As your capital grows and you iron out creases in your strategy, you can slowly increase your leverage.

Keep A Journal

A bit like a diary, but swap out descriptions of your crush for entry and exit points, price, position size and so on. This will be your bible when it comes to looking back and identifying mistakes. CFD trading journals are often overlooked, but their use can prove invaluable.

Hindsight is a powerful force, don’t waste it. You’ll be able to identify patterns, reflect on your trading emotions and streamline strategies. A thorough trading journal should include the following:

The instrument

The time you entered and exited the trade

Reasons for the trade, technical, news-based, etc.

Whether it was a profit or loss

A review of your trade performance (including whether you followed your trading rules)

What you learnt from the trade

It may sound time-consuming but it will allow you to constantly review and improve. You’ll make smarter and faster decisions, whilst those without are still scratching their heads wondering what they’ve been doing wrong for the last few weeks.

Use Stops

Used correctly you’ll be able to minimise your losses, keeping you in the game. Each trade you enter needs a crystal clear CFD stop. This is because emotions will inevitably run high and the temptation to hold on that little bit longer can be hard to resist. As William O’Neil correctly pointed out, ‘letting losses run is the most serious mistake made by most investors.’

So, define a CFD stop outside of market hours and stick to it religiously. This will also help you anticipate your maximum possible loss. You can then use the time you would be fighting an internal battle to research and prepare for the next trade.

Demo Accounts

When you’ve completed your research and you’ve finally got the capital to start trading, it can be hard to resist jumping in head first. However, the switched on day trader will test out his strategy with a demo account first.

Plenty of brokers offer these practice accounts. They’re funded with simulated money, making them the ideal place to make mistakes before your real money is on the line. Not only can you test your strategy and get familiar with CFD trading markets, but they’re also an effective way to try your broker’s trading platform. You can make sure it has all the charting and analysis tools your trading plan requires.

When you’re comfortable and seeing consistent results on your demo account, then upgrade to a live account.

Education

Nobody likes to hear it, but school isn’t over. The best traders will never stop learning. You need to keep abreast of market developments, whilst practising and perfecting new CFD trading strategies. Learning from successful traders will also help. To do all of this you’ll need to utilise a range of different resources. To name just a few:

Regional Differences

Taxes

Although you can trade CFDs all over the world, where you’re based and the market you’re trading in can throw an expensive spanner in the works. CFD trading in the USA will be different to that in the UK, Australia, India, South Africa, and Singapore.

This is mainly because of taxes. Different countries view CFDs differently. Some consider them a form of gambling activity and therefore free from tax. Some countries consider them taxable just like any other form of income.

The tax implications in the UK, for example, will see CFD trading fall under the capital gains tax requirements. Although you get a £10,100 annual exemption, any profits that exceed that will be taxed. This means you should keep a detailed record of transactions so you can make accurate calculations at the end of the tax year.

So, before you start trading, find out whether you’ll pay personal income tax, business tax, capital gains tax, or if you’re lucky, no tax. Once you know what type of tax obligation you will face you can incorporate that into your money management strategy.

Final Word

Day trading CFDs can be comparatively less risky than other instruments. Having said that, it will still be challenging to craft and implement a consistently profitable strategy. If you want to be a successful CFD trader you will need to utilise the educational resources above and follow the tips mentioned. As successful trader Alex Hahn pointed out, If you master your thinking and your emotions, nothing can stop you.’ So, the ball is in your half of the court now, go and turn it into gold.

All contents on this site is for informational purposes only and does not constitute financial advice.
Consult relevant financial professionals in your country of residence to get personalised advice before you make any trading or investing decisions.